Macy’s (M) Q3 Earnings Beat, Sales Miss, View Reiterated

Macy’s, Inc.M posted second straight quarter of positive earnings surprise, when it reported third-quarter fiscal 2017 results. However, total sales fell short of the consensus mark after surpassing the same in the preceding quarter. Nevertheless, management retained its fiscal 2017 view.

Let’s Delve Deep

Macy’s posted adjusted earnings of 23 cents a share that beat the Zacks Consensus Estimate of 19 cents and surged 35.3% from 17 cents reported in the year-ago period. Despite decline in the top line, bottom line increased on account of lower cost of sales and reduced SG&A expenses.

This Cincinnati, OH-based company generated net sales of $5,281 million that came below the Zacks Consensus Estimate of $5,307.6 million and declined 6.1% year over year. Comparable sales (comps) on an owned plus licensed basis dipped 3.6%, while on an owned basis comps fell 4%.

For quite some time now, the company has been grappling with waning comps and dwindling top line. The reflection of the same is quite visible from the stock’s performance. So far in the year, Macy’s shares have plunged 50.9% wider than the industry’s decline of 39.9%. Analysts pointed that the overall industry is grappling with waning mall traffic and increased online competition.

In an attempt to augment sales, profitability and cash flows, the company has been taking steps such as cost cutting, integration of operations as well as developing its e-commerce business and Macy’s Backstage off-price business, along with the expansion of Bluemercury and online order fulfillment centers. Moreover, as a part of store rationalization program, the company plans to shut down underperforming stores. These are seen as a part of the company’s endeavors to better withstand competitive pressure from both brick-and-mortar discount stores and online retailers, such as Amazon.com, Inc. AMZN.

Coming back to results, gross profit in the quarter declined 6% year over year to $2,106 million, however, gross margin expanded 10 basis points to 39.9%. On the other hand, adjusted operating income jumped 4.1% to $176 million, whereas adjusted operating margin increased 30 basis points to 3.3%.

Store Update

During the quarter under review, the company opened eight new freestanding Bluemercury beauty specialty stores and seven new Macy’s Backstage off-price stores within existing Macy’s stores. Early 2018, the company plans to shutter stores in Laguna Hills Mall in Laguna Hills, CA; Stonestown Galleria in San Francisco, CA; and Westside Pavilion in Los Angeles, CA.

Management reiterated its fiscal 2017 guidance. Macy’s continues to project comps on an owned plus licensed basis to decrease in the band of 2-3%. On an owned basis, comps are expected to decline between 2.2% and 3.3%. Management envisions total sales to decline in the range of 3.2-4.3% in the fiscal year. The company projects adjusted earnings in the band of $2.91-$3.16 per share for fiscal 2017.

The Home Depot, Inc. HD delivered an average positive earnings surprise of 3.8% in the trailing four quarters. It has a long-term earnings growth rate of 13.5% and carries a Zacks Rank #2.

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